This fund lands in the 10% of strategies with the lowest ESG risk in the Global Equity Large Cap category, earning it the highest Morningstar Sustainability Rating of 5 globes. ESG risk provides investors with a signal that reflects to what degree their investments are exposed to risks related to material ESG issues, such as climate change and inequalities, that are not sufficiently managed. ESG risk differs from impact, which is about seeking positive environmental and social outcomes.
Ariel International Fund has a Carbon Risk Score of 6.66, indicating portfolio companies face low carbon-related risks in the transition to a low-carbon economy. Currently, the fund has 11.39% involvement in fossil fuels, which compares favorably with 12.19% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas.
One potential issue for a sustainability-focused investor is that Ariel International Fund doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate are more likely to align with the expectations of an investor who cares about sustainability issues. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with tobacco and small arms. Yet this goal is far from achieved, as the fund exhibits 5.41% and 0.52% exposure to tobacco and small arms, respectively. This compares with 0.62% and 0.93% for its average peer in the Global Equity Large Cap category.
The fund has a modest level of exposure (3.14%) to companies with high or severe controversies. Companies with high or severe controversies are involved in incidents such as corruption, employee abuses, environmental incidents, and corporate scandals that pose serious business risks to the company.